Energy Gaps

This note was originally published at 8am on April 19, 2013 for Hedgeye subscribers.

“For unless man were to be like God and know everything, it his better that he should know nothing.”

-John Buchanan


The Gap in the Curtain (1932) is a novel by John Buchanan that speaks to the human desire for certainty, and the dangers its quest can bring.


In a London country house, five party-goers partake in an experiment that allows them a glance at a newspaper that will be printed exactly one year in the future.  The rest of the book tells the story of how that information affected each of their lives over the next year. 


One man reads of a business merger, spends the next year painstakingly traveling the world buying every share of the to-be-acquired company he can find, only to find that the business combination he read of was one nearly out of bankruptcy…  Another character reads his own obituary and dies of a heart attack the night before it prints; he does not live long enough to read the correction the paper issues on the following day for the typo…




This exchange from Core Laboratories’ (CLB) earnings call yesterday reminded me of the novel:


Analyst: “So, what’s your prediction, where is oil going from here?”

David Demshur, CEO of CLB: “Don’t have a clue, my friend.”

I sympathize with the analyst’s question – wouldn’t that be nice to know! – but, more so, I appreciated Demshur’s candid answer.


Gold is going to $2,000…  Oil will spike to $200/bbl…  My price target for the S&P500 at year-end 2013 is 1,458…

Wall Street loves making declarative statements.  I used to think that I had to make them too – I was scared to say “I don’t know,” as if I should have the answers to so many inherently unknowable questions.  But after several humbling experiences early in my career – i.e. being wrong – I have “resigned from the professional undertaking of coin-flipping,” to quote one of my favorite risk managers and thinkers, Hugh Hendry.


Sure, I have my biases – commodity prices tend to mean revert, oil lower (possibly a lot lower), Peyto Exploration (PEY.CN) higher (possibly a lot higher), LINN Energy (LINE, LNCO) and EV Energy Partners (EVEP) lower – but really I try to let the market tell me what to do (embrace uncertainty and our complexity-based models) and make solid risk-adjusted investment decisions given those signals.


Our playbook since the beginning of the year has been long USD and US consumption-oriented sectors, and short commodities and commodity beta.  Our Macro Team reviewed our #StrongDollar theme on our 2Q13 Macro Call on Tuesday – we’re bullish on the USD due to:


-          All-time low interest rates with the prospect of a hike;

-          Cessation of QE initiatives;

-          Improving housing and employment picture;

-          Addressing all-time highs in sovereign debt and deficit ratios;

-          USD solidified as world reserve currency at the expense of a weaker Yen and Euro.


From there we think that a #StrongDollar deflates commodity inflation and takes commodity-levered sectors (XLE and XLB) lower with it.  If you don’t think I should paint a broad brush across “commodities,” tell me why gold and oil have a +0.92 correlation since ’09 (see Chart of the Day).  We think it’s the same “inflation hedge” trade that’s now unwinding… 


Today, the risk management signals across the “financialized” commodity complex are still not good:


-          Gold is bearish TREND (needs to recover: $1,681)

-          Copper is bearish TREND ($3.58)

-          Brent Crude is bearish TREND ($110.54)

-          WTI Crude is bearish TREND ($93.88)

-          Energy Stocks (XLE) are bearish TREND ($76.87)


So as our fundamental #StrongDollar theme plays out, and oil and energy stocks begin to break down across our core TREND duration, we want to be underweight energy, looking for energy stocks to sell/short, and know that our energy long ideas have to be really tight (imminent catalysts or special situations) or levered mostly to natural gas prices (bullish TREND).




Two stocks that I think are worth selling are LINN Energy (LINE, LINCO) and EV Energy Partners (EVEP).  I wanted to hit on this in this note because these stocks are hugely popular among retail investors, which are attracted to that juicy yield (LINE 8%, EVEP 6.5%).  It’s kind of funny – any time Keith or I tweet about LINE/LNCO we get borderline hate-mail in return!  But how much cash a company pays out to its shareholders says nothing of the intrinsic value of the business – and these stocks are hugely overvalued, and their distributions sustained with capital raises.  The distributions paid are inconsistent with the economics of the businesses, and we think it ends in tears.  Hedgeye subscribers, do not be left holding the bag!


Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, USD/YEN, EUR/USD, UST10yr Yield, VIX, and the SP500 are now $1284-1461, $96.72-102.27, $81.95-83.11, 96.63-101.57, $1.29-1.31, 1.68-1.76%, 14.27-18.68, and 1533-1557, respectively.


Have a great weekend,


Kevin Kaiser

Senior Analyst


Energy Gaps - Chart of the Day


Energy Gaps - Virtual Portfolio


Takeaway: If you have to remain invested in the EM space, we like Brazilian and Indian consumer exposure on the long side from here (TREND duration).



  • Consistent with our #StrongDollar/commodity deflation theme as reiterated throughout the past six months, we want to be consistently taking up our exposure to consumption-oriented names and sectors in lieu of those names and sectors that require commodity inflation to drive revenue and earnings growth. With respect the emerging market space, this call was most recently reiterated on our EME Crises Black Book & Conference Call (i.e. long consumption oriented countries and currencies vs. short commodity producing countries and currencies).
  • In line with this view, we like Brazilian and Indian consumer exposure on the long side from here (TREND duration), as the fundamental research signals confirm. This is a good relative play for those analysts and PMs that must maintain a healthy allocation to emerging markets (we're bearish on them, broadly speaking).
  • Regarding Brazil specifically, Brazil is a 81% consumption-based economy (household = 60.3%; government = 20.7%), so negative commodity beta is a positive factor for GDP growth and equity market sentiment/valuations – as it was during late 2008, when Brazil bottomed ahead of most other major equity markets and economies. Flipping over to India, #StrongDollar commodity deflation is supremely positive, at the margins, for the country’s inflation, balance of payments and fiscal policy dynamics – three factors that have weighed on Indian GDP growth and equity market sentiment/valuations in recent years.



Brazilian swap rates are reversing their hawkish trend amid recent confirmation that inflation may finally be headed in the right direction after last month’s +25bps SELIC rate hike and inclusive of the BRL’s +2.1% YTD gain vs. the USD. 1Y OIS are pricing at 54bps above the benchmark SELIC rate, a spread that has tightened -13bps MoM after widening +51bps over the past three.




Regarding the aforementioned inflation confirmation, on Monday the Getulio Vargas Foundation reported that its IGP-M index of wholesale, construction and consumer prices – which has historically led the benchmark IPCA index by two to six months – rose +7.3% YoY in APR after climbing +8.1% YoY in MAR. Regarding the recent moves in the swaps market, it’s clear investors are now pricing in a more dovish outlook for Brazilian monetary policy, on the margin, than they had been as recently as a few weeks ago. Again, everything that matters in macro occurs on the margin.




As we have outlined in our 1/13 note titled: “WILL BRAZIL HOLD THE LINE?”, Brazil is a particularly interesting economy with respect to global inflation/deflation cycles. On one hand, the predominance of Brazilian industrial production and equity exposure (44.3%) is in the Energy and Basic Materials sectors (Bovespa Index). On the other hand, Brazil is a 81% consumption-based economy (household = 60.3%; government = 20.7%), so negative commodity beta is a positive factor for GDP growth and equity market sentiment/valuations – as it was during late 2008, when Brazil bottomed ahead of most other major equity markets and economies.








All told, we want to be increasing our allocation to Brazilian consumer stocks here in anticipation of further upside over the intermediate term.



The SENSEX was up over one full percent today on rate-cut speculation.  According to 33 of 40 economists in a Bloomberg survey, the RBI will lower its repurchase rate to 7.25% from 7.5% in tomorrow’s monetary policy announcement; six see no change and one predicts a cut to 7%. Consensus has indeed finally come our way on RBI rate cut expectations and we’re seeing that reflected in the swaps market: 1Y OIS are pricing at 31bps below the RBI’s benchmark REPO rate, a spread that has narrowed -27bps MoM.




#StrongDollar commodity deflation continues to auger positively for India’s inflation (at a 40-month low of 6% YoY as of MAR), balance of payments (imports of gold account for ~80% of current account deficit and India imports ~80% of its crude oil consumption) and fiscal policy (subsidies are budgeted at ~14% of total FY14 expenditures) dynamics – as outlined in greater detail in our 3/19 note titled: “BUY INDIA ON WEAKNESS?”.








Also positive for the INR was the recent reduction in the foreign investor withholding tax on rupee-denominated debt (from 20% to 5%); that should accelerate private capital inflows into the Indian economy – something the country desperately needs in order to prevent the Finance Ministry’s bloated FY14 borrowing plan from crowding out much-needed domestic investment. Needless to say, any marginal strength in the rupee (+80bps MoM) is only additive to the aforementioned dynamics.




All told, we want to be increasing our allocation to Indian consumer stocks here in anticipation of further upside over the intermediate term.


Darius Dale

Senior Analyst

SAM – EPS Miss on Increased Brand Investment

SAM reported Q1 2013 EPS of $0.51 vs consensus of $0.64 and $0.56 in Q1 ’12 last night. It had a very healthy 20% top-line gain year-on-year (versus a reasonably difficult comparison) with +1% pricing during the quarter. Ciders and teas offset weakness in Samuel Adams, and SAM sees continued competition from domestic specialty and craft beers. FY EPS guidance was unchanged at $4.70 to $5.10.  Great company, great beer - nothing for us do at with this multiple and the stock off 11% today. 


What we liked:

  • Revenue $135.9 million (vs consensus $131.3 million), a 20% year-over-year increase
  • Core shipment volume was approximately 632,000 barrels, an 18% increase compared to Q1 ‘12
  • Momentum continues behind ciders and teas
  • Maintained full-year gross margin guidance
  • FY EPS guidance unchanged at $4.70 to $5.10

What we didn’t like:

  • EPS $0.51 vs consensus of $0.64
  • Gross margin declined to 50% vs 55% in Q1 ‘13
  • In the quarter, advertising, promotional and selling expenses increased $5 million versus the prior year, and FY guidance raised by $18 million to $26 million - the craft segment might be getting a little toppy here
  • G&A increased $3.1 million versus the prior year

The company is introducing its Samuel Adams Boston Lager in a can this May, with the new innovation ready for summer occasions where glass bottles are not prohibited. Be on the look out!




Robert Campagnino

Managing Director





Matt Hedrick

Senior Analyst

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In an effort to evaluate performance and as a follow up to our YouTube, we compare how the quarter measured up to previous management commentary and guidance





BETTER:  While guidance for the balance of the year was effectively unchanged, the quarter did come in a little better than expected on the back of strong performance in NA (relative to easy guidance) and strength in fees as well as some other one time items.  Results would have been even better if not for some one-time SG&A items


MAR 1Q13 REPORT CARD - mar444



  • WORSE:  Group booking pace for the Marriott Hotels and Resorts Brand was up 4% for remainder of 2013, reflecting a more cautious short-term corporate demand environment
  • PREVIOUSLY:  "As of year-end, our Group pace was running about 6%, probably a little more rate than occupancy in that."


  • BETTER:  While management did not specifically comment on the booking window on this call, the fact that short term bookings for group are suffering warrants "caution."  Longer-term bookings are showing strength with 2014 booking pace "improving dramatically" to being up 5% vs. being down 4% just a year ago.  This commentary was consistent with what we've heard from MAR's peers.
  • PREVIOUSLY:  "You're seeing the window lengthen a little bit. It's not lengthening a lot, but it's lengthening a little bit which means those groups are saying, I need to book it now... or I'm not going to get those dates I want out there because the occupancy has strengthened."


  • SAME:  The hotel openings seem to be on schedule and Marriott still intends to market them for sale once they open
  • PREVIOUSLY:  "We'll invest probably in those three properties you mentioned about $900 million in total. About $250 million of that will be in 2013. They're in various stages of completion. London will be finished and opened probably by June of this year. Miami, which is on South Beach, probably first quarter of 2014. And then the Clock Tower in New York City will be probably early 2015, give you kind of timing.  We'll recycle those hotels, sell those hotels shortly after they open, anywhere from six months, three to six months maybe after that, and recycle that capital."


  • SAME:  Marriott reiterated their position of keeping leverage in the 3.00x-3.25x range
  • PREVIOUSLY:  "We're a BBB company, investment grade. That gets us into the commercial paper market. That's where we want to be. So we try to stay at a 3.00x-3.25x adjusted debt-to-adjusted EBITDA. So as EBITDA grows, that creates debt capacity for that."


  • BETTER:  Incentive fee growth was impressive this quarter.  What was even better was that some of the larger US hotels started paying fees. Marriott did not comment on 2014 or getting back to peak on this call but the takeaway was more positive on the margins.
  • PREVIOUSLY:  "What you'll see as we have those growth in rooms outside the U.S. in Asia-Pacific, Middle East, you're going to see an acceleration of incentive fees for those hotels. We're projecting by 2014, we'll be back at that $370 million level. But it'll be more international, less domestic."


  • WORSE:  Despite the transition in China being complete, the austerity measures in place on government spending are having a negative impact on RevPAR.  Thailand and Indonesia were strong but not good enough to offset China weakness.  MAR now expects RevPAR for Asia Pacific to increase in the low single-digit range, with the back half being better given the easier comps for China.
  • PREVIOUSLY:  "With the leadership transition complete, we think China travel should regain its footing later in the year.  We expect Thailand and Indonesia to remain strong throughout the year. In Asia, we expect first quarter REVPAR to increase at a mid single-digit rate, strengthening a few points as the year progresses."


  • LITTLE BETTER:  Given the strength in 1Q,  MAR raised the low end of their NA guidance by 50bps for FY13- essentially just carrying out the benefit of a stronger 1Q
  • PREVIOUSLY:  "Across North America, we anticipate systemwide RevPAR in 2013 will increase 4% to 7% in the first quarter and full-year. The high-end of that range reflects today's strong demand and limited supply. The low-end reflects our view that the federal government's inability to reach a comprehensive fiscal agreement will continue, and the automatic sequestration will go into effect on March 1."


  • WORSE:  While RevPAR was up 7% in 1Q13, Marriott guided to low single-digit increases for the balance of the year
  • PREVIOUSLY:  "In the Caribbean and Latin America region, we expect first quarter REVPAR will increase at a mid single-digit rate, improving to a mid-to-high single-digit rate for the full year. Here, we're more bullish than in October. While economic growth has slowed a bit in Brazil, we've seen lodging demand strengthen in Mexico and the Caribbean."


  • LITTLE WORSE:  European RevPAR was down almost 3% in 1Q, largely due to weak results coming out of the UK due to difficult comps from London Olympics.  Marriott still expects flat RevPAR growth for the balance of the year.
  • PREVIOUSLY:  "In Europe, we expect some modest improvement in GDP in 2013, but given the tough comparison to the Olympics and other events, we are still expecting flattish REVPAR growth for the quarter and the full-year, similar to our outlook in October."


  • LITTLE BETTER:  1Q RevPAR grew 11% and FY guidance was for high single-digit RevPAR increases
  • PREVIOUSLY:  "In the Middle East and Africa, we are modeling a mid single-digit increase in RevPAR, consistent with our October outlook, with double-digit REVPAR growth in the first quarter."


  • SAME:  Marriott didn't spend as much time on financing availability on this call. They did say that availability is getting better for high-quality limited service projects
  • PREVIOUSLY:  "We have seen on a limited service side financing getting a little better, but it's still under terms that are requiring the developer to guarantee the debt, provide credit enhancements. And the leverage isn't what it was way back when, so to speak. But that money is becoming available, especially from regional and local banks as the CMBS market has strengthened providing capacity for those. As to the full-service hotels, especially whether a suburban or even urban full-service hotels, we haven't seen new construction type financing. Now financing is starting to show up for asset sales, but not for new construction."

LONG THE TRIFECTA: Labor Market, Housing & Confidence All Accelerating

Takeaway: Improvement in the Housing & Labor markets should support consumption as the slope of recovery in household income and net worth accelerates

Labor Market, Housing, and (now) Confidence Trends all continue to accelerate.   Ongoing improvement in the Housing and Labor markets should further support consumption as the slope of recovery in household income and net worth accelerates. Moreover, ongoing improvement in the domestic macro data is supportive of our bullish view on the U.S. Dollar on both an absolute basis and on a relative basis as US fiscal and monetary policy expectations get tighter, on the margin, while ECB and BOJ fiscal/monetary policy expectations get looser, on the margin.  


Positive consumer related data in combination with expectations for further $USD appreciation keeps our Strong Dollar – Strong Domestic Consumption (Down Commodities) theme the predominant strategic framework driving our equity and asset class exposure. 


Below we summarize this morning’s claims data along with the consumer confidence and housing data of the last week. 


Initial Claims:  How Low Can We Go?

The positive acceleration in labor market trends continued this week with both the seasonally adjusted and non-seasonally adjusted Initial Jobless Claims series showing sharp sequential improvement.   The headline number fell 15K to 324K w/w versus the prior week’s unrevised number while the 4-week rolling average in SA claims fell -16.5K w/w to 342K.


The 4-week rolling average in NSA claims, our preferred judge of trend with respect to underlying conditions in the labor market, improved 240bps w/w with the year-over-year change in 4-wk rolling claims improving to -8.6% Y/Y from -6.2% Y/Y the week prior, and -3.8% two weeks prior.


Given the ongoing and marked improvement in the claims series, how much additional upside could we seen from current levels?  Our head of financials, Josh Steiner, answered that question in the context of the historical cycles observed over the period 1967-present:


Thinking longer term about the setup, rolling claims (SA) are currently at 342k with the most recent week at 324k. The first chart below shows the claims history (rolling SA) back to 1967. Every economic cycle since the late 1970s has seen claims trough at around 300k. To be precise, in prior cycles, claims bottomed at: 


* 312k  November, 1978

* 287k  January, 1989

* 266k  April, 2000

* 286k  February, 2006


This works out to an average of 288k with a standard deviation of 19k (on a very small sample). In other words, we're still 54k above historical cycle troughs or roughly 2.8 standard deviations, a pretty healthy margin of error for the bull case.


In short, rolling NSA claims are 8.6% lower than last year and the positive improvement is accelerating.  Moreover, the current, positive trend is overwhelming both the negative seasonal distortion currently present in the data and any negative sequestration related drag. 


Source: Hedgeye Financials 

LONG THE TRIFECTA: Labor Market, Housing & Confidence All Accelerating - JS 1


LONG THE TRIFECTA: Labor Market, Housing & Confidence All Accelerating - JS 2


LONG THE TRIFECTA: Labor Market, Housing & Confidence All Accelerating - JS 3


Consumer Confidence:  The Bloomberg Consumer Confidence Index made a new 5Y high two weeks ago with confidence measures across  age and income demographics showing broad improvement.  The index held those gains last week and made a new 5Y with this morning’s reading improving to -28.9 from -29.9 w/w.  The Conference Board Consumer Confidence as well as the University of Michigan Consumer Sentiment readings were confirmatory with the lastest, April readings accelerating sequentially to 68.1 and 76.4, respectively. 


For most of the last 4 years, historical relationships with economic data have broken down with correlations moving towards zero as confidence readings have largely tracked sideways.  Over the longer-term, consumer confidence has served as a decent to very good lead indicator for economic activity.  For example, on a 10Y basis, lagged correlations to New Manufacturing Orders, PCE Services, and M2 velocity are all > 0.85.  With consumer confidence readings beginning to break out here alongside ongoing improvement in the housing and labor markets, we’re monitoring for any re-tightening in the relevant confidence-econ activity correlations a little more closely


LONG THE TRIFECTA: Labor Market, Housing & Confidence All Accelerating - Bloomberg Consumer Comfort


LONG THE TRIFECTA: Labor Market, Housing & Confidence All Accelerating - Confidence vs M2   New Orders


Housing:  We provided a summary recap of the most recent housing data last week (HERE).  Incremental data over the past week has reflected more of the same as Mortgage Purchase Applications remained at their YTD highs while the Pending Home Sales and Case-Shiller HPI data both accelerated sequentially.  The Purchase application data and Pending Home sales numbers both suggest forward housing demand should remain strong. 


Additionally, President Obama’s likely nomination of Congressman Mel Watt to replace Ed DeMarco as head of the FHFA should be taken as a positive catalyst for housing.  DeMarco has opposed underwater principal forgiveness for GSE borrowers – a stance that may be lightened should Watt be confirmed.  


LONG THE TRIFECTA: Labor Market, Housing & Confidence All Accelerating - Case Shiller HPI


LONG THE TRIFECTA: Labor Market, Housing & Confidence All Accelerating - MBA Purchase Apps


Christian B. Drake

Senior Analyst 



This note was originally published May 02, 2013 at 09:59 in Gaming

Yes, hold was a little high but Vegas beat our number and we were above the Street.  As we pointed out in our positive MGM preview note on 4/18/13, Macau held low in the quarter but should post around $200 million in hold adjusted EBITDA.  Since they hit our actual estimate of $180 million we are sticking to our hold adjusted estimate – a definite positive for the stock. City Center also likely had high hold, but high hold seems to be more of the norm for that property. 


Stock will be up obviously on the open but we think the momentum could persist through the quarter.  Management should be very bullish on the LV turnaround and second quarter trends to date.  They didn’t mention the hold impact in Macau in the release but they should be on the call.  MGM Macau is a legitimate $200 million per quarter property.  We know April finished up 13% for the market and our expectation is that growth will accelerate in May.


We also think there is incentive for MGM to do an equity deal at higher levels to de-lever.  Therefore, they probably won’t hold back on this call.  We remain concerned over the long-term with US gaming demographic and slot trends but MGM could go a lot higher over the near and intermediate term.



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